Which among the following steps is most likely to be taken at the time of an economic recession?
[UPSC Civil Services Exam – 2021 Prelims]
(a) Cut in tax rates accompanied by increase in interest rate
(b) Increase in expenditure on public projects
(c) Increase in tax rates accompanied by reduction of interest rate
(d) Reduction of expenditure on public project
Answer: (b)
Explanation:
- An economic recession is typically defined as a decline in the gross domestic product (GDP) for two or more consecutive quarters.
- High-interest rates are a cause of recession because they limit liquidity, or the amount of money available to invest. Hence statements 1 and 3 are not correct.
- Public expenditure gives rise to positive externalities to the economy and society as a whole (or in specific sectors and geographical areas), the more so through its capital component. Hence statement 2 is correct.
